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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO ___________
COMMISSION FILE NO. 33-9875
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BOSTON ACOUSTICS, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2662473
(State or other jurisdiction (I.R.S. employer
of incorporation or identification no.)
organization)
300 JUBILEE DRIVE
PEABODY, MASSACHUSETTS 01960
(Address of Principal Executive Offices) (Zip Code)
(978) 538-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
There were 4,927,795 shares of Common Stock issued and outstanding as of August
13, 2001.
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Boston Acoustics, Inc.
Index
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Page
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Part I: Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited)-
March 31, 2001 and June 30, 2001 4
Consolidated Statements of Income (Unaudited)-
Three months ended June 24, 2000 and June 30, 2001 6
Consolidated Statements of Cash Flows (Unaudited)-
Three months ended June 24, 2000 and June 30, 2001 7
Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Part II: Other Information
Items 1 through 6 14
Signatures 15
2
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
3
Boston Acoustics, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
Assets
------
March 31, 2001 June 30, 2001
-------------- -------------
Current Assets:
Cash and cash equivalents $ 2,785,846 $ 4,109,521
Accounts receivable, net of reserve of
approximately $385,000
and $430,000, respectively 11,426,411 11,277,823
Inventories 24,622,417 19,177,276
Deferred income taxes 2,044,000 2,044,000
Prepaid expenses and other current assets 747,844 807,875
----------- -----------
Total current assets 41,626,518 37,416,495
----------- -----------
Property and Equipment, at cost:
Land 1,815,755 1,815,755
Building and improvements 8,816,515 8,824,787
Machinery and equipment 15,132,205 15,297,212
Office equipment and furniture 4,907,967 4,945,685
Motor vehicles 253,164 253,164
----------- -----------
30,925,606 31,136,603
Less-accumulated depreciation
and amortization 15,533,147 16,204,115
----------- -----------
15,392,459 14,932,488
----------- -----------
Other Assets 1,012,671 1,014,164
----------- -----------
$58,031,648 $53,363,147
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
4
Boston Acoustics, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
Liabilities and Shareholders' Equity
------------------------------------
March 31, 2001 June 30, 2001
-------------- --------------
Current Liabilities:
Accounts payable $ 2,743,371 $ 3,304,045
Accrued payroll and payroll-
related expenses 1,779,942 1,659,502
Dividends payable 418,990 418,863
Other accrued expenses 2,682,654 1,715,310
Accrued income taxes --- 73,365
Current maturity of line of credit 1,500,000 1,500,000
----------- -----------
Total current liabilities 9,124,957 8,671,085
----------- -----------
Line of credit, net of current portion 10,000,000 6,000,000
----------- -----------
Minority interest in joint venture 27,325 41,405
----------- -----------
Shareholders' Equity:
Common stock, $.01 par value -
Authorized -- 8,000,000 shares
Issued -- 5,101,814 and 5,100,314 shares at
March 31 and June 30, 2001 respectively 51,018 51,003
Additional paid-in capital 1,191,973 1,191,988
Subscriptions receivable (292,417) (272,917)
Retained earnings 40,357,136 40,108,927
----------- -----------
41,307,710 41,079,001
Less-Treasury stock, 172,500 shares, at cost 2,428,344 2,428,344
----------- -----------
Total shareholders' equity 38,879,366 38,650,657
----------- -----------
$58,031,648 $53,363,147
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
5
Boston Acoustics, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
Three Months Ended
------------------
June 24, 2000 June 30, 2001
------------- --------------
Net sales $22,823,028 $19,895,567
Cost of goods sold 15,558,859 14,385,137
----------- -----------
Gross profit 7,264,169 5,510,430
----------- -----------
Selling and marketing expenses 2,708,739 2,530,046
General and administrative expenses 1,234,186 1,155,093
Engineering and development expenses 1,375,650 1,324,256
----------- -----------
Total operating expenses 5,318,575 5,009,395
----------- -----------
Income from operations 1,945,594 501,035
Interest income 19,217 43,741
Interest expense (105,120) (160,028)
Other expense (20,207) (11,094)
----------- -----------
Income before provision
for income taxes 1,839,484 373,654
Provision for income taxes 690,000 203,000
----------- -----------
Net income $ 1,149,484 $ 170,654
=========== ===========
Net income per share
Basic $ .23 $ .03
=========== ===========
Diluted $ .23 $ .03
=========== ===========
Weighted average common shares outstanding
Basic 4,908,245 4,929,114
Diluted 4,914,654 4,941,282
Dividends per share $ .085 $ .085
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
6
Boston Acoustics, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
-------------------
June 24, 2000 June 30, 2001
------------------- --------------
Cash flows from operating activities:
Net income $ 1,149,484 $ 170,654
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 762,200 671,973
Changes in assets and liabilities,
Accounts receivable 1,032,674 148,588
Inventories (2,084,254) 5,445,141
Prepaid expenses and other current assets 40,391 (60,031)
Accounts payable 1,041,657 560,674
Accrued payroll and other accrued expenses 65,292 (1,087,784)
Accrued income taxes 691,134 73,365
----------- -----------
Net cash provided by operating activities 2,698,578 5,922,580
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment, net (1,834,052) (210,997)
Decrease (increase) in other assets (2,452) 11,582
----------- -----------
Net cash used in investing activities (1,836,504) (199,415)
----------- -----------
Cash flows from financing activities:
Dividends paid (417,201) (418,990)
Repayments of line of credit (318,788) (4,000,000)
Decrease in subscriptions receivable --- 19,500
----------- -----------
Net cash used in financing activities (735,989) (4,399,490)
----------- -----------
Increase in cash and cash equivalents 126,085 1,323,675
Cash and cash equivalents, beginning of period 1,506,741 2,785,846
----------- -----------
Cash and cash equivalents, end of period $ 1,632,826 $ 4,109,521
=========== ===========
Supplemental Disclosure of NonCash Financing Activities:
Dividends payable $ 417,201 $ 418,863
=========== ===========
Minority interest in foreign subsidiary $ --- $ 14,080
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes $ --- $ 39,000
=========== ===========
Cash paid for interest $ 111,887 $ 157,629
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
7
Boston Acoustics, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(1) Basis of Presentation
The unaudited consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission and include, in the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of interim period results. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The Company
believes, however, that its disclosures are adequate to make the information
presented not misleading. The results for the three-month period ended June 30,
2001 are not necessarily indicative of results to be expected for the full
fiscal year. These financial statements should be read in conjunction with the
Company's Annual Report included in its Form 10-K for fiscal year ended March
31, 2001.
(2) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following:
March 31, 2001 June 30, 2001
-------------- -------------
Raw materials and work-in-process $ 8,374,305 $ 7,699,611
Finished goods 16,248,112 11,477,665
----------- -----------
$24,622,417 $19,177,276
=========== ===========
Work-in-process and finished goods inventories consist of materials, labor
and manufacturing overhead.
(3) Net Income Per Common Share
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings per Share. SFAS No. 128 establishes
standards for computing and presenting earnings per share (EPS) and applies to
entities with publicly held common stock or potential common stock. Basic EPS
is computed by dividing net income by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
from common stock equivalents (stock options). For the three-month periods
ended June 30, 2001 and June 24, 2000, there were 412,600 shares and 510,140
shares, respectively, that have been excluded from the weighted average number
of common and dilutive potential shares outstanding as their effect would be
anti-dilutive.
8
A reconciliation of the number of shares used in the calculation of basic
and diluted income per share, is as follows:
For the three months ended
June 24, 2000 June 30, 2001
------------- -------------
Basic weighted average common
shares outstanding 4,908,245 4,929,114
Dilutive effect of assumed exercise
of stock options 6,409 12,168
--------- ---------
Weighted average common shares
outstanding assuming dilution 4,914,654 4,941,282
========= =========
(4) Segment Reporting
The Company has two reportable segments: 1) core, and 2) original equipment
manufacturer (OEM) and multimedia.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company does not allocate
operating expenses between its two reportable segments. Accordingly, the
Company's measure of profit for each reportable segment is based on gross
profit.
OEM and
Three months ended June 30, 2001 Core Multimedia Total
-------------------------------- ----------- ---------- -----------
Net Sales $12,822,736 $7,072,831 $19,895,567
=========== ========== ===========
Gross profit $ 4,584,778 $ 925,652 $ 5,510,430
=========== ========== ===========
OEM and
Three months ended June 24, 2000 Core Multimedia Total
-------------------------------- ----------- ---------- -----------
Net Sales $13,411,332 $9,411,696 $22,823,028
=========== ========== ===========
Gross profit $ 4,825,776 $2,438,393 $ 7,264,169
=========== ========== ===========
(5) Significant Customers
For the three-month periods ended June 30, 2001 and June 24, 2000, two
customers represented approximately 46% and 49% of the Company's net sales,
respectively.
(6) International Operations
The Company maintains sales concentrations in Europe, Asia, and Canada in
addition to distributing product through three foreign subsidiaries. Export
sales accounted for approximately 20% and 17% of net sales for the three-month
periods ended June 30, 2001 and June 24, 2000, respectively.
9
(7) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 establishes accounting and reporting disclosure standards for derivative
instruments including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. SFAS No.
133, as amended by SFAS No. 137, Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133,
and SFAS No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities - An Amendment of FASB Statement No. 133, is effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000. The
Company adopted the provisions of SFAS No. 133 and SFAS No.138 during its first
quarter ended June 30, 2001. The adoption of this statement did not have a
material impact on its consolidated financial position or results of operations.
The Securities and Exchange Commission issued Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition, in December 1999. The Company adopted the
provisions of SAB No. 101 during the fourth quarter of Fiscal 2001. The adoption
of SAB No. 101 did not have a material impact on the Company's financial
position or results of operations.
(8) Reclassifications
Certain amounts in the prior-period consolidated financial statements have
been reclassified to conform to the current period's presentation.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
The following table sets forth the results of operations for the three-month
period ended June 24, 2000 and June 30, 2001 expressed as percentages of net
sales.
Three Months Ended
------------------
June 24, 2000 June 30, 2001
------------- -------------
Net sales 100.0% 100.0%
Cost of goods sold 68.2 72.3
------ ------
Gross profit 31.8 27.7
------ ------
Selling and marketing expenses 11.9 12.7
General and administrative expenses 5.4 5.8
Engineering and development expenses 6.0 6.7
------ ------
Total operating expenses 23.3 25.2
------ ------
Income from operations 8.5 2.5
Interest income (expense), net (.4) (.5)
Other expense (.1) (.1)
------ ------
Income before provision for
income taxes 8.0 1.9
Provision for income taxes 3.0 1.0
------ ------
Net income 5.0% 0.9%
====== ======
Net sales decreased approximately 13 percent, from $22,823,000 during the
first quarter of Fiscal 2001 to $19,896,000 during the first quarter of Fiscal
2002. The overall reduction in sales is the result of the continuing downturn in
the economy and its significant impact on the Company's business segments,
particularly computer multimedia speaker sales. Sales of the Company's core
products decreased approximately 4.5 percent compared to the same three-month
period a year ago, while sales of the OEM and Multimedia Retail segment were
down 25 percent.
During June 2001, the Company made initial shipments of its new VR-M80 and
VR-M90 floor standing speakers systems, complimenting the VR-M50 and VR-M60
bookshelf speaker systems. Also included in this product category are the VR-MC
center channel speaker and the VR-MX surround speakers. The VR-M80 and the VR-
M90 with suggested retails of $2,000 and $2,700 per pair, respectively, are
available in cherry or black ash real wood veneer.
11
The Company's gross margin for the three-month period ended June 30, 2001
decreased as a percentage of net sales from 31.8% to 27.7% due primarily to the
product mix of OEM/Multimedia sales resulting in lower margins for the quarter
as compared to the same period a year ago. Gross margins on the core business
segment remained relatively stable despite lower margin closeout sales of
discontinued products which were offset by cost savings experienced in
production scrap expenses and warehousing costs as compared to the same period a
year ago.
Total operating expenses decreased in absolute dollars during the three-
month period ended June 30, 2001 reflecting Company-wide reduced spending.
However, as a percentage of net sales, total expenses increased due to the lower
than expected sales level during the current three-month period. Selling and
marketing expenses have decreased in absolute dollars primarily due to
reductions in corporate advertising and related expenses compared to the same
period a year ago. General and administrative expenses have also decreased in
absolute dollars due to reductions in outside consulting services and insurance
costs as compared to the same three-month period a year ago. Engineering and
development expenses have decreased in absolute dollars reflecting the
termination of offsite rented office space in August 2000 and reduced spending
on supplies and outside services during the period ended June 30, 2001.
Net interest expense increased in both absolute dollars and as a percentage
of sales during the three-month period ended June 30, 2001. The increase is due
to an increase in the Company's average quarterly outstanding line of credit
balance for the period ended June 30, 2001 as compared to the period ended June
24, 2000. The increase was partially offset by lower borrowing rates as compared
to the same three-month period a year ago and the repayment of $4 million of the
Company's outstanding line of credit in June 2001.
The Company's effective income tax rate decreased from 37.5% for the three-
month period ended June 24, 2000 to 36.6% for the three-month period ended June
30, 2001 due to lower state income taxes and international sales representing a
larger percentage of total sales for the current period.
Net income for the three-month period ended June 30, 2001 decreased from
approximately $1,149,000 to $171,000 while diluted earnings per share decreased
from $.23 to $.03 per share. The decrease is primarily attributable to the
overall decrease in sales, the low margin sales of discontinued products, and
operating losses in the Company's European subsidiaries.
Liquidity and Capital Resources
As of June 30, 2001, the Company's working capital was approximately
$28,745,000, a decrease of $3,756,000 since the end of Fiscal 2001. The
decrease in working capital was primarily due to the repayments made on the
Company's line of credit borrowings, as well as reductions in inventory
balances. The Company's cash and cash equivalents were approximately $4,110,000
at June 30, 2001, an increase of $1,324,000 since March 31, 2001. Current
liabilities decreased by approximately $454,000 due to decreases in accrued
expenses partially offset by an increase in accounts payable. The Company has
two lines of credit with two banking institutions totaling $26,500,000. At June
30, 2001, the Company had borrowings totaling $7,500,000 under its $25 million
revolving credit agreement, and $0 outstanding under its $1.5 million revolving
credit agreement.
The Company believes that its current resources are adequate to meet its
requirements for working capital and capital expenditures through at least
Fiscal 2002.
Significant Customers
The Company's financial results for the three-month period ending June 30,
2001 include significant OEM sales of multimedia speaker systems to Gateway,
Inc. ("Gateway"). The terms of these sales are governed by a Master Supply
Agreement between Gateway and the Company which defines such issues as ordering
and invoicing procedures, shipping charges, warranties, repair service support,
product safety requirements, etc. This Master Supply Agreement with Gateway does
not contain minimum or scheduled purchase requirements; therefore, purchase
orders by Gateway may fluctuate significantly from quarter to quarter.
12
Based on information currently available from our OEM customer, the Company
anticipates that our OEM sales should decrease during the fiscal year ending
March 30, 2002 as compared to Fiscal 2001. The loss of Gateway as a customer or
any significant portion of orders from Gateway could have a material adverse
affect on the Company's business, results of operations and financial position.
In addition, the Company could also be materially adversely affected by any
substantial work stoppage or interruption of production at Gateway or if Gateway
were to reduce or cease conducting operations.
Cautionary Statements
The Private Securities Litigation Reform Act of 1995 contains certain safe
harbors regarding forward-looking statements. From time to time, information
provided by the Company or statements made by its directors, officers, or
employees may contain "forward-looking" information which involve risk and
uncertainties. Any statements in this report that are not statements of
historical fact are forward-looking statements (including, but not limited to,
statements concerning the characteristics and growth of the Company's market and
customers, the Company's objectives and plans for future operations, and the
Company's expected liquidity and capital resources). Such forward-looking
statements are based on a number of assumptions and involve a number of risks
and uncertainties, and accordingly, actual results could differ materially.
Factors that may cause such differences include, but are not limited to: the
continued and future acceptance of the Company's products, the rate of growth in
the audio industry; the presence of competitors with greater technical,
marketing and financial resources; the Company's ability to promptly and
effectively respond to technological change to meet evolving consumer demands;
capacity and supply constraints or difficulties; and the Company's ability to
successfully integrate new operations. The words "believe," "expect,"
"anticipate," "intend" and "plan" and similar expressions identify forward-
looking statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date the statement was
made. For a further discussion of these and other significant factors to
consider in connection with forward-looking statements concerning the Company,
reference is made to Exhibit 99 of the Company's Form 8-K filed on July 18,
1996.
13
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
No reports on Form 8-K were filed during the quarter ended June 30,
2001.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Boston Acoustics, Inc.
----------------------
Registrant
Date: August 13, 2001 By: /s/ Andrew G. Kotsatos
-----------------------
Andrew G. Kotsatos
Director, Chief Executive Officer
and Treasurer
Date: August 13, 2001 By: /s/ Moses A. Gabbay
-------------------
Moses A. Gabbay
Director, President
and Chief Operating Officer
Date: August 13, 2001 By: /s/ Debra A. Ricker-Rosato
--------------------------
Debra A. Ricker-Rosato
Vice President and
Chief Accounting Officer
15